# MADHUBHAI AMATHALAL GANDHI v. THE UNION OF INDIA

- **Citation:** [1961] 1 S.C.R. 191
- **Court:** Supreme Court of India
- **Decided:** 1961
- **Bench:** B. P. Sinha, J. L. Kapur, P. B. Gajendragadkar, K. RrrBBA RAo, K. N. Wanchoo
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/madhubhai-amathalal-gandhi-v-the-union-of-india-1919
- **Pages:** 20

## Headnote

Stock Exchange-Rules for membership-Notification laying·
conditions restricting membership -
Classification between active
members and others-,-Whether unreasonable or infringed fundamental
rights-Securities Contracts (Regulation) Act, z956, (42 of r956) s. 4
~Securities Contracts (Regulation) Rules, ·r957, rr. r7-22.
The Securities Contracts (Regulation) Act, 1956, was enacted with the object of preventing undesirable transactions in
securities by regulating the stock exchange business, and the.Act
conferred an effective controlling power on. the Central Government over the stock exchange. In exercise of the power conferred
on the Central Government to make rules the Central Government made rules described as the Securities Contracts (Regulation) Rules, 1957, providing, int~r:alia, for the•qualification for
membership of a stock exchange ·seeking recognition etc. After
the Act came into force ~wo Companies, namely, the Native Share
and. Stock Brokers' f\ssociation and the Indian Stock Exchange
Limited doing stock exchange business in Greater Bombay applied for recognition under the· Act: The Government after consi- .
dering the merits 6f the companies and the relevant circumstances issued a notification dated August 31, 1957, r~cognising
the Native Share and Stock Brokers' Association under the name
"The Stock Exchange, Bombay" subject to certain conditions.
One of the/cohditfons was that the members of the other com-
. pany, India·Stot~Exchange Limited, would be entitled to apply·
for membership hf the Stock Exchange, Bombay, provided they
were active members of the Indian Stock Exchange Limited for
12 months immediately preceding August 6, 1957. and they were
also eligible under r. 8(1) of the Securities Contracts (Regulation)
Rules, 1957, to be members of a recognised sto9k exchange.
Within the time granted for applying for membership a number 'of active members of the Indian Stock Exc4ange Limited
applied for membership and were admitted as members of the
recognised Stock Exchange. Though three years had elapsed
after this no member. other than the petitioner· questioned the
validity of the notification which was accepted and therecognised. Stock Exchange became established. The petitioner, how-
- ever, filed a petition under Art. 32. of the Constitution praying
. that the Union be directed to withdraw or cancel the notification
dated August 31, 1957, recognising the Stock Exchange, Bombay,
under s. 4 ·of the Securities Contracts (Regulation)· Act, 1956.
Subsequently on November 30, 1957~ the Central GoV¢mment
19150
August 17.
192
SUPRE:\iE COURT REPORTS
[ l 961]
1960
issued another notification applying s. 13 of the Act to Greater
Bombay with the result that thereafter every contract in shares
Mad1&uhha1
between the members of any unrecognised stock exchange in
An1atAalal (;andlii that city v.·ould be illegal.
The contentions of the petitiont:r in
v.
the petition for the issue of a \\·rit of mandamus v.•ere that
The Union of
under Art. 19(1){g) of the Constitution he had a fundam,,utal
India
right to carry on business in shares anJ the two notifications in
question imp0scd unreasonable restrictions on his right, that the
notification dated August 3r, 1957, \Va:> void as it \\·a:; not sa11ctioncsl by the provisions of s. 4 of the'Act, that the condition 2(i)(a) of the said notification classifying members oi the
Indian Stock Exchange IJimited as active members and members
who were not active infringed fundamental right granted under
Art. r4 of the Constitution and as the s1id condition was not
severable the entire notiJication was l>ad.
The respondent
besides controverting the said contentions furthe_r contended that
as the petitioner had not <!_tJestioned the validity of the Act itself the notification issued thereunder could not l>c questioned.
Held, that the \'olidity of a notification could not he questioned if it v;as issued under a self contained 1\ct and restated
the provisions of the Act the validity of ~hich was

## Text

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l S.C.R. SUPREME COURT REPORTS
191
MADHUBHAI AMATHALAL GANDHI
v.
THE UNION OF INDIA.
(B. P. SINHA,. c. J., J. L. KAPUR, P. B. GAJENDRAGADKAR, K. RrrBBA RAo and K. N. WANCHOO, JJ.)
Stock Exchange-Rules for membership-Notification laying·
conditions restricting membership -
Classification between active
members and others-,-Whether unreasonable or infringed fundamental
rights-Securities Contracts (Regulation) Act, z956, (42 of r956) s. 4
~Securities Contracts (Regulation) Rules, ·r957, rr. r7-22.
The Securities Contracts (Regulation) Act, 1956, was enacted with the object of preventing undesirable transactions in
securities by regulating the stock exchange business, and the.Act
conferred an effective controlling power on. the Central Government over the stock exchange. In exercise of the power conferred
on the Central Government to make rules the Central Government made rules described as the Securities Contracts (Regulation) Rules, 1957, providing, int~r:alia, for the•qualification for
membership of a stock exchange ·seeking recognition etc. After
the Act came into force ~wo Companies, namely, the Native Share
and. Stock Brokers' f\ssociation and the Indian Stock Exchange
Limited doing stock exchange business in Greater Bombay applied for recognition under the· Act: The Government after consi- .
dering the merits 6f the companies and the relevant circumstances issued a notification dated August 31, 1957, r~cognising
the Native Share and Stock Brokers' Association under the name
"The Stock Exchange, Bombay" subject to certain conditions.
One of the/cohditfons was that the members of the other com-
. pany, India·Stot~Exchange Limited, would be entitled to apply·
for membership hf the Stock Exchange, Bombay, provided they
were active members of the Indian Stock Exchange Limited for
12 months immediately preceding August 6, 1957. and they were
also eligible under r. 8(1) of the Securities Contracts (Regulation)
Rules, 1957, to be members of a recognised sto9k exchange.
Within the time granted for applying for membership a number 'of active members of the Indian Stock Exc4ange Limited
applied for membership and were admitted as members of the
recognised Stock Exchange. Though three years had elapsed
after this no member. other than the petitioner· questioned the
validity of the notification which was accepted and therecognised. Stock Exchange became established. The petitioner, how-
- ever, filed a petition under Art. 32. of the Constitution praying
. that the Union be directed to withdraw or cancel the notification
dated August 31, 1957, recognising the Stock Exchange, Bombay,
under s. 4 ·of the Securities Contracts (Regulation)· Act, 1956.
Subsequently on November 30, 1957~ the Central GoV¢mment
19150
August 17.
192
SUPRE:\iE COURT REPORTS
[ l 961]
1960
issued another notification applying s. 13 of the Act to Greater
Bombay with the result that thereafter every contract in shares
Mad1&uhha1
between the members of any unrecognised stock exchange in
An1atAalal (;andlii that city v.·ould be illegal.
The contentions of the petitiont:r in
v.
the petition for the issue of a \\·rit of mandamus v.•ere that
The Union of
under Art. 19(1){g) of the Constitution he had a fundam,,utal
India
right to carry on business in shares anJ the two notifications in
question imp0scd unreasonable restrictions on his right, that the
notification dated August 3r, 1957, \Va:> void as it \\·a:; not sa11ctioncsl by the provisions of s. 4 of the'Act, that the condition 2(i)(a) of the said notification classifying members oi the
Indian Stock Exchange IJimited as active members and members
who were not active infringed fundamental right granted under
Art. r4 of the Constitution and as the s1id condition was not
severable the entire notiJication was l>ad.
The respondent
besides controverting the said contentions furthe_r contended that
as the petitioner had not <!_tJestioned the validity of the Act itself the notification issued thereunder could not l>c questioned.
Held, that the \'olidity of a notification could not he questioned if it v;as issued under a self contained 1\ct and restated
the provisions of the Act the validity of ~hich was accepted.
If, however, the Act conferred a power on the State in general
terms and the notification issued thereunder infringed any of the
fundamental rights it could be attacked even though the Act
was valid.
The Stock Exchange Rules did not operate as a har against
the petitioner becoming a member of the Stock Exchange subject to the rules governing such application_
The restrictions and conditions in1posed under the notification in question were not unreasonable.
The condition restricting membership to active members only is germane to the
recognition of the Stock Exchange and is therefore, a condition within the meaning of "any other conditions" in cl. (b) of
'subs. (1) of s. 4 of the Act.
The classification bet'.Yeen active members and others was
justifiable and the period fixed by the Government as the
standard for ascertaining the active membership was neither
arbitrary nor unreasonable.
There was a presumption in favour of the State that there
y.·as a reasonable basis for the classification and the burden to
prove that it violated the guarantee of eqcal protection lay on
the petitioner who impcachr.d it.
ORIGINAL JURISDICTION:
Writ Petition No, 136 of
1957_
Writ Petition under Art. 32 of the Constitution. of
India for enforcement of Fundamental Rights,
-
,.
1 S.C.R. SUPREME COURT REPORTS
193
Purshoitam Tricumdas, Mukund R. Mody, Anil
B. Divan, Ramesh A. Shroff and I. N. Shroff, for the
petitioner.
G. K. Daphtary, Solicitor.General of India, R. Ganapathy Iyer and R. H. Dhebar, for respondent.
1960.
August 17. The Judgment of the Court was
delivered by
SUBBA RAO J.-This is a petition under Art. 32 of
the Constitution for the issue of a writ of mandamus
or a writ in the nat·ure of mandamus or any other
appropriate direction, order or writ to direct the respondent, the Union of India, to withdraw or cancel
the notification dated August 31, 1957, recognising
" the Stock Exchange, Bombay " under s. 4 of the
Securities Contracts (Regulation) Act, 1956 (XLII of
1956), (hereiμafter referred to as "the Act").
At the outset it is necessary to notice briefly how a
Stock Exchange is worked and how it is controlled or
regulated by the State. "Stock Exchange " means,
"any body of iudividuals, whether incorporated or
not, constituted for the purpose of assisting or controlling the business of buying, selling or dealing
in securities". The history of stock exchanges in
foreign countries as well as in India shows that the
development of joint stock enterprise would never
have reached its present stage but for the facilities
which the stock exchanges provided for dealing in
securities. They have a very important function to
fulfil in the country's economy. Their main function,
in the words of an eminent writer, is "to liquify capital by enabling a person who has invested money in,
say, a factory or a railway, to convert it into cash by
disposing of his share in the enterprise to someone
else". vVithout the stock exchange, capital would
become immobilized. The proper working· of a stock
exchange depends upon not only the moral stature of
the memberll but also on their calibre. It is a trite
saying that a jobber or dealer is born and not made.
In the words of the same author, a jobber must be a
man of good nerve, cool judgment, and ready to deal
25
Madhubhai
Amathalal Gandhi
v.
The Union of
India
Subba Rao J.
194
SUPREME COURT REPORTS
[1961]
i96o
under a.ny ordinary conditions, a.nd he must be a ma.n
M dh b. .
of fina.ncial sta.nding, considerable experience, with a.n
"Ama•h"ala~ ~::idhi understanding of ma.rket psychology. There a.re three
v.
modes of dee.ling in she.res and stocks, na.moly, (1) spot
ne Unio>< of delivery contra.ct., i.e., .a. contra.ct which provides for
I.•dia
the actua.I delivery of securities on the pa.ymeut of a.
price thereof either on the da.y of the contra.ct or the
Subba Rao f. next da.y, excluding perhaps tht' period taken for the
despatch of tho securities or the remilta.nce of money
frwn one place to a.nother; (2) rea.dy delivery contra.ct,
which means a contra.ct for the purchase or sale of
securities for the performance of which no timo is
specified and which is to be performed immediately
or within a rea.sona.ble time; (3) forward contra.cts, i.e.,
contra.ots whereunder the parties a.gree for their performa.nce at a future <late. If the stock exchange is
in the ha.nds of unscrupulous members, the second a.nd
third categories of contracts to buy or sell shares ma.y
degenerate into highly specula.tive tranea.ctions or,
wha.t is worse, purdy gambling ones.
Whero tho
parties do not intend wbilo entering into a contract of
sa.le or purchase of securities tha.t only difference in
prices should be pa.id, the tra.nsa.ction, even though
speculative, is valid and not void, for "there is no law
age.inst speculation as there is age.inst gambling".
But, if the pa.rties do not intend tha.t there should be
a.ny delivery of tho she.res but only the difference in
prices should be accounted for, tho contract, being a
wa.ger, is void. More often than not it is difficult for
a. court to distinguish one from the other, as a wagering transaction may be so cleverly camoufia.ged a.s to
pa.ss off a.s a. speculative transaction. These mischievpus
potentialities inherent in the tra.nsa.ctions, if left
uncontrolled, would tend to subvert the ma.in object of
the institution of stock excha.nge and convert it into a.
den of gambling which would ultimately upset the
industrial economy of the country.
For tha.t reason, in Bomba.y a.s ea.rly as 1925, tho
Bomba.y Securities Contracts Control Act was pa.sscd to
regulate and control contracts for the purchase and
'sale of securities in the City of Bombay a.nd elsewhere
in the J3ombay Presidency. Under s. 6 of tha.t Act,
-
•
I
~
1 S.C.R. SUPREME COURT REPORTS
195
"Every contract for the purchase or sale of securities,
r960
other than a ready delivery contract, entered into
after a date to be notified in this behalf by the Pro-A
Madhubhai
'
' \ G
h ]J b
'd
J
h
.
matha/al Gandhi
vmc1a
overnment s a
e vo1 , un ess t e same is
made subject to and in accordance with the rules duly. Tile J~ion of
sanctioned under s. 5 and every such contract shall be
India
void unless the same is made between members or
through a member of a ree<ignised stock exchange;
Subba Rao J.
and no claim shall be allowed in any Civil Court for
the recovery of any commission, brokerage, fee or
reward in respect of any such contract". But this
Act defined " ready delivery contract " to mean " a
con tract for the purchase or sale of securities for performance of which no time is specified and which is to
be performed immediately or within a reasonable
.time". It was also stated therein by way of explanation that what was reasonable time was in each particular case a question of fact. This Act did not achieve
its purpose, for under s. 6 thereof contracts entered
into in contravention of the provisions of that section
were not made illegal but only void, with the result
that even members of a stock exchange not recognised
under that Act were able to do business in that line.
What. is more, the explanation to the definition of
"ready delivery contract" which is excluded from the
operation of the Act was so elastic that in the name
of ready deli very contracts unrecognised stock exchanges and individuals were able to carry on business in forwa:rd contracts. Gambling in shares went
on unchecked in Bombay as elsewhere.
After the
Second World vVar, the post--war boom gave an unhealthy impetus tO the stock exchange transactions.
Various expert committees appointed by the Government from time to time considered .the question of
regulation of stock exchanges and the latest of those
committees was the Gorwalla Committee.
'JJhe report
of that Committee was circulated to the principal stock,
exchanges, Chambers of Commerce, and other interested associations and individuals. After considering the
reports of the committees . and the comments made
thereon by the various bodies, the Government introduced a biil in the Parliament, which became law on
196
SCl'HElllE COURT REPORTS
[l!J61]
196o
September 4, 1956. The Act wa.s passed to prevent
undesirable transactions in securities by regulating the
Am~~~:~~;,,;,:'.,d,., business t~er~in by prohibiting auction a.nd by providv.
ing for certam other matters connected therewith.
The u,,;,,, of The Act mainly provides for the recognition of stock
1 .. J,a
exchanges and for controlling the rule-ma.king of the
sa.id exchanges. Section 4 of the Act empowers the
Subba Rao J. Central Government to recognise stock exchanges
subject to two conditions. Section 13 enables it to
issue a notification that in a. pa.rticula.r State or area
every contra.ct which is entered into after the date of
the notification otherwise than between members of a
recognised stock exchange in such State or 1irea or
through or with such member shall be illega.1. Without
resorting to such drastic procedure the Government is
a.lso given power to prohibit e,ontracts in certain
securities in certain areas from doing business without
obtaining a licence.
Spot deli very contracts arc
excluded· from the operation of ss. 13, 14, 15 and 17 of
the Act, unless the Central Government by notification thinks fit to extend the operation of s. 17 of the
Act to such contracts. Section 19 prohibits formation
of stock exchanges other than recognised ones except
with the permission of the Central Government. It
declares all auctions in securities entered into after the
commencement of the Act illega.l. It aiso provides
penalties for the infringements of tho provisions of the
Act. In short, the Act confers an effective controlling
power on the Central Government over the stock
exchanges.
In exercise of the power conferred upon the Central
Government to make rules, tho Centre.I Government
made rules described as the Securities Contracts
(Regulation) Rules, 1957, providing, inter alia, for the
qualification for membership of a stock exchange seeking recognition, the procedure for recognition, the
manner of keeping accounts, the submission of a.nnua.l
reports, the constitution of governing bodies and for
taking disciplinary action age.inst any member of such
bodies and other similar matters.
·In Greater Bombay there were two stock exchanges,
1 S.C.R. SUPREME COURT REJ;'ORTS
197
one called the Native Share & Stock Brokers' AssociaI960
tion~ and the other the . Ind~an Stock Exchange
.w adhabhai
Limited. The former was m existence for more than Aniathalal Gandhi
80 years and it was registered under the Bombay
v.
Securities Contracts Control Act, 1925. Its rules and
The Union of
bye-laws were approved by the Government of BornIndia
bay and it was doing business in both forward as well
d
•
I
h
J
•
h
d
Sttbba Rao ].
as rea y transactions.
t
as a c earing ouse an
was doing extensive business in different kinds of
securities.
The other, namely, the Indian Stock Exchange
Limited, was a company incorporated under the
Indian Companies Act, 1913,. as a company limited by
guarantee without any share capital. The said Company had been functioning since 1937, but was not
registered under the Bombay Securities Contracts
Control Act, 1925. It was mainly doing business in
Tata Ordinary and Bombay Dyeing shares and had
hardly any investment business. Not being registered
under the Bombay Securities Contracts Control Act,
1925, it could only deal in ready delivery contracts;
and as .the definition of "ready delivery contract"
under that Act was elastic and as forward contracts
were not made illegal thereunder, this Exchange was
also doing speculative business mainly in the said
two shares.
After the Act came into force, both the Exchanges
applied for recognition under the Act. The Government, after considering the relative merits and the
relevant circumstances, issued a notification dated
August 31, 1957, recognising the Native Share and
Stock Brokers' Association under the name " The Stock
Exchange, Bombay" subject to the conditions mentioned therein. One of the conditions imposed was that
the members of the Indian Stock Exchange Limited
would be entitled to apply for membership of the
Stock Exchange, Bombay, provided they were active
members of the Indian Stock Exchange Limited for
12 months immediately preceding August 6, 1957,
and they were also eligible under r. 8(1) of the Securities Contracts (Regulation) Rules, 1957, to be members of a rncognised stock exchange. The notification
198
SUP!tEME COURT REPOHTS
[ l 961]
1 ?~ 0
further gave some concessions to such act.i vc momhors
. .
in the matter of payment of the membership fee.
Madhuohn•
Th
h d
1 f'
be h'
b f'
0
b
15
AriiatJinlal Ctoidlu
ey a to a.pp .V or mom
rs ip
c ore
cto er
,
v.
1957, or before such period as the Boa.rd of the rocognisThr l'•'o" of ed Stock ExDha.nge might think fit tp extend. It appel•di•
ars that within the extended timCY a number of active
members of the Indian St,ock Exchange Limited as
5 "bb• Rao J. defined by tho notification
a.ppli<).~ for lll('mlJership
and were admitted as mem hers ;Jif. the recognised
Stock Exchange. Though three ~·ears have ·passed
by, no member other than the petitioner has so fa.r
thought fit to question the va.lidity·of the notification,
that is, the validity of the· notification has been
accepted and the recognised Stock Exchange bas
become stabilised on that ha.sis.
Subsequent to the .
filing of the petition on November 30, 1957, the
Central Government issued another notification applying s. 13 of the Act to Greater Bombay; wit.h the
result that thereafter every contract iri shares between
the members of a.n.v unrecognised stock excha.nge in
that City would be illegal.
The p!'titionor had become a m~mber of the Indian
Stock Exchange Limited on February 27, 1956, hut he
had not been tmnsacting any business on the tlo0r of
.. _.
the S<~id Stock Exchange either on his own account or
on account of his clients.
He aver; in the affidavit
filed in support of the petition that he has been doing
considcrablo business on bis own account or. on
account of his clients through other member< of the
Stock Exchange and that he intends to commenl'e
business directly in ready delivery contracts.
A~ the
impugned notifications affect his right to do business,
he seeks for the issue of a writ of mandamus for the
aforesaid reliefs.
Shri Purshotta.m TrikumdaA, learned counsel for·
the petitioner,
ra.i~<.'d before UR the following contentions: (1) under Art. l9(1)(g) of the Constitution the
petitioner has a fundamental right to carry on the
busincAs in shares and the notification dated August
31, 1957, and the subsequent notification dated
Nonmber 30, 1957, imposed unreasonable restrictions
on his said right; (2) the notification dated August 31,
1 S.C.R. SUPREME COURT REPORTS
199
'
1957, is void inasmuch as it is not sanctioned by the
r96o
provisions of s. 4 of the Act ; and (3) the condition
M dh bh .
2(i)(a) of the said notification classifying members of Amath:i.7 c:'ndhi
the Indian Stock Exchange Limited as active memv ..
hers and members who were not active infringes the Tl« Union of
fundamental right enshrined in Art. 14 of the ConstiIndia
tution and that as the said condition is not severable
the entire notification is bad.
Subba Ra9 J.
Learned Solicitor-General in addition to controverting the said contentions pressed on us to hold that
as the vfres of the Act was not questioned, the notification issued thereunder could not be questioned by
the petitioner on the ground that it contravened one
or other of the said fundamental rights.
It would be convenient to take first the contention
of the learned Solicitor-General as it is in the nature
of a preliminary point. He says that as the validity
of the Act was not questioned the notification issued
in the exercise of the power conferred thereunder
cannot also be questioned. There is a fallacy underlying
this contention. Under Art. 13(2) of the Constitution,
· the Stat!e shall not make any law which takes away or
abridges the rights conferred by Part III thereof; and
"law" is defined under Art. 3(a) to include a notification. Therefore, the validity of a notification issued
by the State, it being law, is as much vulnerable to
attack as that of the Act itself on the ground that it'
infringes any of the funditmental rights. If an Act is
a self-contained one and the notification issued thereunder only restates the provisions of the Act, the validity of the notification cannot obviously be questioned
as the validity of its contents were accepted.
But if
the Act confers a power on the State in general terms
/
and the notification issued thereunder infringes one or
other of the fundamental rights, the validity of the
Act cannot equally obviously prevent an attack on
the notification. In the former case . the notification
only reflects the provinions of a valid Act and in the
latter it is the notification and not the Aot that infringes the fundamental rights. Take an example of an
Act imposing restrictic.ns on the freedom of speech.
The Aot authorizes the, State to impose conditions on
200
SUPREME COURT REPORTS
[1961]
/
1960
the said freedom in the interests of security of State.
Madlmbha•
1:he :'-ct is constitutionally valid .. But, if a notificaAmal/rn/al Gandf;i t10n issuer! under that Act imposes unreasonable rest-
"·
rictions infringing the said rights, it is liable to be
Tiu Union of challenged on the ground of unconstitutionality. So
India
too, in the instant case s: 4 of the Act empowers the
Central Government to iBBue a notification recognising
· S11hba Rao J · a stock exchange subject to certain conditions express.
ed in general terms. The general terms can comprehend both reasonable and unreasonable restrictions. If
the notification imposes unreasonable restrictions-if
the contention of the learned counsel for the petitioner be accepted, the restrictions imposed would certainly be unreasonable-it is liable to be set a.side.
We
cannot, therefore, accept this contention .
. Re. (l): Article 19(l)(g) of the Constitution states
that every citizen shall have the right to carry on
any business; but the State in empowered under cl. (6)
of the said Article to make any law i!"posing in the
interest of the gen>!ral public reasonable restrictions
on the exercise of the. said right.
Briefly stated, the
argument is that the combined effect of the two notifications is that the petitioner is driven out of his
business of stock exchange in as much as, it is said;
they confer a. monopoly on the Stock Exchange, Bombay, and the rules of the said Stock Exchange exclude
any outsider from becoming its member without
obtaining a nomination and that too only in the place
of an existing member. To put it differently, the
argument proceeds that under the rules of the Stock
Exchange, Bombay, membership is not thrown open
to the public. This leads us to. the consideration of
,
the relevant provisions of the Stock Exchange Rules,
Bye-laws and Regulations, 1957.
Under r. 3 the
membership of the Exchange shall consist of such
number of members as the Exchange in genoral meeting may from time to time determine. It is common
case that the membership of the Exchange is not
limited.
U uder the heading " Election of I\ ew Members", the Rules prescribe the conditions of eligibility for election as a member of the Exchange. These
Rules adopt the provisions of. r. 8 of the Securities
....
1 S.C.R. SUPREME COURT REPORTS
201
Contracts (Regulation) Rules, 1957.
The Rules do
z96o
not contain any limitation on the eligibility of a perM
1 bk .
ad tu
ai
son to be elected as a member such as that the person Amathalal r;andhi
should be nominated in the ma,nner provided by the
v.
Rules or that he should come only in the vacancy
The Union of
caused by another member ceasing to be one in one of
India
the ways mentioned thereunder. The words "no per-
,, .
h
k .
Subba Rao ].
son m r. 17 are comprehensive enoug to ta em any
outsider seeking for election as a member.
Rule 22
provides for an application for admission in the form
prescribed 'in Appendix A to the Rules. This rule
also does not impose any such limitation. The admission application form in Appendix A is also general in
terms and enables any person of India to apply for
membership provided he agrees to abide by the conditions imposed therein. In the form also there is no
such limitation. But it is contended that a fair reading of the provisions of rr. 20 and 21 makes it clear
that a candidate for admission is confined only to two
ca,tegories, viz., (1) a candidate nominated by a member or a legal representative of a deceased member
seeking admission to membership in the place of the
deceased ; and (2) a person recommended for admission
to membership in the place of a member who has
forfeited his right to membership.
A careful scrutiny
of the Rules does not bear out the contention ; nor do
they enable us to cut down the wide amplitude of
rr. 17 to 22. Rule 10 says:
" vVhen a right of membership is forfeited to or
vests in the Exchange under any Rule, Bye-law, or
Regulation of the Exchange for the time being in force
it shall belong absolutely to the Exchange free of all
rights, claims or interest of such member or any person claiming through such member and the Governing
Body shall be entitled to deal with or dispose of such
right of membership as it may think fit."
Rule 54 is to the following effect:
"A member's right of membership shall lapse to
and vest in the Exchange immediately he is declared
a defaulter."
Rule 11 is as follows :
26
202
SGPRE.ME COGRT REPORTS
[1961]
196o
"(a) A member of not less than seven years'
bh
standing who desires to resign may nominate a person
Madhu "'
l" "bl
d
b
R I
,.
d · ·
be h"
Am tho/al Gandh• e 1g1 e un or t ese
u es .or a m1ss10n to mem
rs 1p
•
v.
of the Exchange as a candidate for admission in his
Thi Union of place.
India
(b) The !!'gal representatives of a deceased member or his heir8 or the persons mentioned in Appendix
Swbb• Rao J. C to these Rules may with the sanction of the Governing Boa.rd nominate any person eligible under these
Rules for admission to membership of the Exchange
as a candidate for admission in tho place of tho deceased member.
In considering such nomination the
Governing Board shall be guided so far as pra.ctica ble
by the instructions Sl"t out in Appendix C to these
Rules."
·
Appendix B gives the nomination forms Nos. I and 2
to be filled by a member or a legal representative, as
the ca.so may be, under r. 11 (a) and (b).
Now it
would be convenient to read rr. 20 and 21.
They are
as follows:
Rule 20 : " A candidate for admission except a
candidate applying for a membership vesting in the
Exchange must obtain a nomination in the manner
provided in these Rules."
Rule 21: "A candidate for admission must be
recommended by two members none of whom should
be a member of the Governing Boa.rd. The rcoommenders must have such personal knowledge of the candidate and of his past and present circumstances as
shall satisfy the Governing Boa.rd."
The argument is that under r. 20 a candidate for a.dmiBBion fa.Us under two categories, namely, (l) a candidate who must obtain a nomination in the manner
provided in the Rules, i.e., r. ll (a) and (b); and (2) a.
candidate applying for a membership vesting in the
Exchange; and, therefore, these two categories exhaust the candidates for admission and that when
under r. 21 the ea.me words, "a. candidate for admission", a.re used they must carry the ea.me meaning as
·· in r. 20, that is, they must be confined only to the two
oa.tegories comprehended by r. 20. This argument
ap~ars to be plausible and even incontrovertible, if
1 S.C.R. SUPREME COURT REPORTS
203
rr. 20 and 21 are taken out of their setting and cons-
'96°
trued independently of other rules. But in the setting
M dh bh .
in which they appear they can bear only one meaning, Ama•h:la~ G:~dhi
namely, that r. 20 provides for nomination only in
v.
the case of a candidate for admission who requires a
Th• Union of
nomination in the manner provided by the rule and
India
r. 21 provides, for all the candidates for admission,
that they should be recommended by two members
Subba Rao f.
who have personal knowledge of the candidates.
To
put it in other words, under the Rules candidates for
admission fall under three groups, viz., (l) candidates
falling under r. II, (a) and (b); (2) candidates applying for membership vesting in the Exchange; and (3)
other candidates.
All the three categories of candidates must be recommended by two members.
But
the candidates belonging to the first category shall in
addition be nominated in the manner provided by the
Rules.
We, therefore, hold that the Stock Exchange
Rules do not operate as a bar against the petitioner
becoming a member of the Stock Exchange subject to
the rules governing such application. The petitioner
has the right to do business in shares : in spite of the
notifications he can still do business in spot delivery
contracts. He can apply to become a member of the
Stock Exchange subject to the conditions laid down by
the Rules.
The Act, the validity of which he has not
chosen to question, enables the State to give or refuse
recognition to any Stock Exchange and it has chosen
to give recognition to the Stock Exchange, ·Bombay,
subject to the conditions prescribed. The restrictions, in our view, are not unreasonable, having
regard to the importance of the business of a stock
exchange in the country's national economy and
having regard to the magnitude of the mischief sought
to be remedied in the interest of the general public.
At another place we have already dealt with the
necessity for stringent rules governing this type of
business. For the reasons mentioned we reject the
first contention.
Re. (2) : The second contention also has no merits.
The criticism is that condition 2(i) (a) annexed to the
notification cannot be supported on the basis of any
204
Sl'PRE:\IE COCHT REPORTS
[ 1961]
1y60
of the provisions of s. 4 of the Act.
Condition 2 (i)
reads as follow~:
"'"d"""'""
" 'I'h
111
b
f
h
I d.
S
k E
h
Amafluilal <;a11d/i1
.
e . em ers 0
t c
n 1a.n I toe
xc a.nge
v.
Limited, Bombay, will be entitled to apply for ~IcmTh• u"''" ,,f bership of the Stock Exchange, Bombay, provided
InJ1a
they fulfil or comply with the following torms and
Subba Nao _/.
conditions :-
(a) they have beon active members of the Indian
Stock Exchange Limited, for twelve months immediately preceding the 6th August, 1957.
Explanation: ·"Active Members" for purpOHf' of
this conditfon means members who have themselves
transacted business regularly on tho floor of the Indian
Stock Exchange Limited either on their own account
or on account. of their clients.
"
To appreciate the argument it is also necessary to
read the material pro\'ibions of"· 4 of the Act.
Section 4: "(1) If the Central Government is satisfied, after making such inquiry as ma.y be necessary
iu this bohalf and after obtaining such further information, if any, as it may requirc,-
(a) that the rules and bye-laws of a stock exchange applying for registration are in conformity
with such conditions as may be prescribed with a
view to ensure fa.ir dealing and to protect investors;
(b) that the stock e:rnhange is willing to comply
with any other conditions (including condition~ as t-0
the number ofmemhers) which the Central Government after consultation with the governing body of
the stock exchange aud having regard to the aroa
served by t.he AU>ck exchange and its standing and
the nature of the securities dealt with by it, may
impose for the purpose of carrying out the objects of
this Act; and
(c) that it would be in the interest of the trade
and also in the public interest to grant recognition to
the stock exchange;
It may grant recognition tot.he stock exchange subj<'ct to the conditions imposed upon it as aforesaid and
in such form as may be prescribed.
(2) The conditions which the Central Government
1 S.C.R. SUPREME COURT REPORTS
205
may prescribe under clause (a) of sub-section (1) for
I96°
the grant of recognition to the stock exchanges may
1 1
.
· 1 d
h
d" .
J .
A O< hubha<
ItlC u e, among ot er matters, con 1t1ons re at1ng Aniathalal Gandhi
to,-
v.
(i) the qualifications for membership of stock exThe Unwn of
changes;
India
(ii) the manner in which contracts shall be enterd
d
f
d
Subba Rao ].
re into an en orce as between members;
(iii) the representation of the Central Government
on each of the stock exchanges by such number of persons not exceeding three as the Central Government
may nomina.te in this behalf; and
(iv) the maintenance of accounts of members and
their audit by chartered accountants when ever such
audit is required by the Central Government. "
The argument proceeds that condition 2(i)(a) enables
only the active members of the Indian Stock Exchange Limited to apply for membership of the Stock
Exchange, Bombay and that such a conditfon can be
imposed only if it amounts to a qualification of membership within the meaning of sub-s. (2) of s. 4, as the
other conditions in that sub-section are obviously inapplicable. It is further pointed out that sub-s. (2)
refers back to sub-s. (i)(a) and under that clause the
condition imposed must only be that prescribed by the
Rules made under the Act and that the condition imposed by the notification is not a condition so prescribed.
There is force in this argument; but, the
acceptauce of this contention does not advance the
case of the petitioner, for, if the condition is not covered by cl. (a) of s. 4(1), it falls under cl. (b) thereof.
Under that clause, the Central Government may grant
recognition to a stock exchange if the said stock exchange is willing to comply with "any other conditions". It is said that the other conditions in s. 4
(l)(b) must only be conditions relating to the area
served by the stock exchange, its standing and the
nature of the securities dealt with by it.
This is not
what cl. (b) of s. 4(1) says. The conditions under cl. (b)
of s. 4(1) no doubt shall he such as may be impose<l
by the Government, having regard to the aforesaid
three consi<lerations, but they need not necessarily be
206
SUPRE:\fE COURT REPORTS
.[1961]
1 960
confined only to the said considerations. The Govern11 -;;; 1 ,
ment may impose a.ny conditions, no doubt germane
Am~/},: 1 ~;"~:;,dh• to the recognition of a stock exchange, after consultav.
tion with its governing boa.rd, and having regard to
The 1:,,;o., of the said considerations. It cannot be said that con1"drn
dition 2(i)(a) imposed on the St-0ck Exchange is not a
condition germane to its recognition. The record
Sflll,a Rao J · discloses that the Central Government in recognising
the Stock Exchange sought to avoid the consequential
J
hardship on the members of the rival stock exohange
and therefore imposed the said condition on tho Stock
Exchange, Bombay, as a condition for its recognition.
The
condition is germane to recognition of the
Stock l<;xchangc and is, therefore, a condition within
the meaning of "any other conditions" in cl. (b) of
sub-s. (I) of s. 4 of tho Act.
Re. (3): Learned counsel for the petitioner advanced
a forcible argument questioning the validity of condition 2(i)(a) of the notification on the ground that it
infringed Art. 14 of the Constitution. Elaborating his
argument, tho learned counsel stated that the said
condition classified members of the Indian Stock Exchange Limited into two groups, one active members
and the other who were not active members, and that
that olassification was arbitrary and had no reasonable relation to the object sought t-0 be achieved by the
notification.
He fort her pointed out that the defining
of active members as those who had themselves trans11.cted business regularly on the floor of the Indian
Stock Exchange Limited either on their own account
or on account of their clients for 12 months immediately preceding August 6, 1957, was not only arbitrary
a.nd vague but also, if analysed, would lead t-0 anomalies destructive of any standard of reasonableness. It is
alleged in the affidavit filed by the petitioner that from
the inception of the Indian Stock Exchange Limited,
l!l!l members of the said Stock Exchange were actually
trading on the floor of the said Exchange' from time
to time but for some reason or the other were not
trading during the period of 12 months immediately
preceding August 6, 1957; that there were 34 members of the said Stock Exchange who were reguliuly
J
1 S.C.R. SUPREME COURT REPORTS
207
transacting business on the floor of the said Stock
I960
Exchange prior to August 6, 1956, and for some time
after August 6, 1956, but not during the entire period Ani;~;.~:~b~:~dhi
of 12 months from August 6, 1956 to August 6, 1957;
v.
and that there were 24 members of the said Stock The Unfon of
Exchange who started transacting business regularly
India
on the floor of the said Stock Exchange some time
after August 6, 1956 ansJ. continued to transact busiSubba. Rao J.
ness right upto and after August 6, 1957. It was
asked what was the reasonable basis for confining the
definition of active · members to those
who were
carrying orr business during the period of 12 months
from August 6, 1956 to August 6, 1957, while excluding the aforesaid thre~ categories who were equally
active members and indeed more active than those
included in the definition. It was further asked what
was the justification for excluding a. member who was
an active member for yea.rs before the crucial year
and irregularly conducted business on the floor of the
Stock Exchange during the crucial year while including a member who might have been a newcomer or
who might have been earlier a nominal member but
began to do business regularly only during the said ·
year. Emphasis was also laid upon the alleged elastic
· and indefinite content of the word " regular " and it
was suggested that the said word could not possibly
afford a precise standard. These are all weighty considerations and we must confess that there is force in
them. But there is the other side of the picture. It
is well-settled that a classification must have reasonable relation to the object sought to be achieved. The
standard of reasonableness is inextricably conditioned
by the extent and nature of the evil and the urgency
for eradicating the same. The object of the notification is twofold. The main object is to carry out the
-purpdse of the Act, namely, to prevent undesirable
transactions in securities by regulating the business in
them. The subsidiary object is to assuage the hardship
that .recognition of only one stock exchange would
cause to the members of the other association. Te
achieve this twin objeot the classification is ma.do !.et.
ween active members and inactive members. While
208
SlJPRK\lE COCRT. REPORTS
[1961]
i96u
on the one. hand the Government found it necessary to
. .
exclude the nominal members who would add their
Am~:":;~~~~i!-~<.:
1
;ut1n dead\\·cigl.it. to the recognised associatiou and bring
v.
down it.8 efficiency and affect its di:iciplined conduct
nc c"'"" of of business, on the other hand it ga>c opportunity to
Indw
persons who were actively iuterested in the business
to b"come regular members of the Stock Exchange,
S•thba Ua(l
I
13
b
'l'h
·
·
· ...
·
1·
1 J
· ·
om ay.
ere is every JUHt1!wat.zon
or exc.u< ing
members who had not. beeu taking active interest. in
the business, for, as we have already pointed out, the
efficient carrying out of the business of the Stock
Exchange depends upon the moral stature, high
calibre, and genuine and active internst evinced by the
members.